Economic Update 8-05-2019

• Last week saw the Federal Reserve reduce interest rates, largely as expected, although the official statement language was mixed. Positively, consumer confidence rose last week, as did personal income and housing, while manufacturing results showed some weakness. The employment situation report for July came in largely as expected, showing decent growth, although the pace of improvement has slowed.
• Equity markets in the U.S. and abroad declined several percent during the week, due to announcements of new tariffs on China and Fed policy language being less accommodative than expected. Conversely, bonds fared very well as interest rates across the yield curve declined sharply. Commodities also declined on net, with energy and industrial metals falling in price.

U.S. stocks experienced their worst week of the year so far, ending in losses across the board. After a decent start upon hopes for an accommodative Fed, markets reversed and declined Wed. following the Fed policy move, with language that was a little more tempered and hesitant to continue with further cuts as some may have expected. Then again, with economic growth in terrible shape, such a measured approach shouldn’t be overly surprising. Worse yet, this was coupled with the administration’s surprise announcement, via Twitter, of a 10% tariff on the $300 bil. in remaining imports from China, to take effect on Sept. 1, absent any agreements or postponements put forth before then. (This would be in addition to the $250 bil. of items already subject to a 25% tariff level. This new round would affect a far broader swath of consumer goods, including a larger proportion of consumer items, such as apparel and shoes.)

By sector, utilities ended as the only positive performer, with a minimal gain, while consumer discretionary and technology stocks lost the most ground, down over -4% each—the latter due to perceived impacts from the new round of any tariffs. The Russell 2000 small cap index was actually pushed back into the zone of a -10% correction from its high point from August a year ago.

Foreign stocks lost ground to a slightly greater degree than U.S. equities, despite little change in the dollar. Japan fared best in a bad week, outperforming the U.S., Europe and the U.K., while emerging markets fared worst. The Bank of Japan elected to leave monetary policy unchanged, with short rates in negative territory and longer-term bond yields pegged at zero. Aside from weakening economic data, the trade issues between the U.S. and China have continued as the primary drivers of European sentiment, although the rising chances of a no-deal Brexit in the U.K. have risen with the new prime minister. In emerging markets, stocks in Asia were hit with losses of up to -5% due to perceived trade effects, while commodity exporters also suffered, such as Russia and selected Latin American nations. South Africa and Turkey continued to be negatively affected by country-specific policy concerns.

U.S. bonds experienced one of their better weeks, with gains of nearly a percent for the Bloomberg BarCap Aggregate. Treasuries outperformed corporate credit slightly, while high yield and bank loans ended the week with minor losses. Internationally, developed market treasuries fared similarly to U.S. government bonds, up around a percent, while local emerging market debt lost nearly -2%.

Real estate ended the week as one of the few risk assets to fare well, with falling interest rates acting as a tailwind in the U.S.; foreign real estate lost ground, but to a lesser degree than broader equities. Per usual, defensive segments such as healthcare and self-storage outperformed, while cyclical lodging/resorts lost ground.

Commodities lost ground on the week, led by negative results in the economically-sensitive components, including energy and industrial metals. Precious metals were the sole gaining group, with gold benefitting from stock market volatility and lower real interest rates. Despite a major drop mid-week, the price of crude oil fell by only -1% on net to end at just under $56/barrel, blamed on the less accommodative Fed language and trade frictions that threaten economic growth—and oil usage.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                   

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.